Advisory Opinion to Bennet (03-13-03)

March 13, 2003

Victoria Bennett, J.D.
Risk Manager
Arkansas Children's Hospital
800 Marshall St.
Little Rock, AR 72202-3591

Dear Ms. Bennett:

This letter responds to your request on behalf of Arkansas Children's Hospital (ACH) for an advisory opinion relating to the applicability of the Non-Profit Institutions Act (NPIA or the Act) to sales of pharmaceuticals by ACH to patients seen in clinics that are located on ACH's campus but are operated by the University of Arkansas for Medical Sciences (UAMS). The Act exempts from the Robinson-Patman Act "purchases of their supplies for their own use by schools, colleges, universities, public libraries, churches, hospitals, and charitable institutions not operated for profit."(1) In light of the close affiliation between the two institutions in the delivery of patient care, it is our opinion that pharmaceuticals purchased by ACH for resale to patients seen at those UAMS clinics would be covered by the NPIA.

According to your request letter, ACH is a free-standing nonprofit children's hospital that is academically affiliated with UAMS. The relationship between the two institutions is close and multi-faceted: UAMS' Department of Pediatrics is located on the ACH campus, and ACH is the primary teaching hospital for several of UAMS' pediatric training programs. The two institutions coordinate their clinical services, educational programs, and research, and a large number of UAMS nurses and other professionals work at ACH. While UAMS has no ownership interest in ACH or right of control over its management, UAMS physicians serve as medical directors of some ACH departments and of ACH itself.

ACH operates 78 specialty clinics on its campus. Most, if not all, of the doctors practicing in these clinics are UAMS employees. ACH bills for these physicians' services pursuant to a contract between ACH and the UAMS physicians. UAMS also operates three outpatient clinics, located on the ACH campus, that are staffed by UAMS employees. According to your letter, these UAMS clinics are, from the point of view of the patient, indistinguishable from the ACH clinics, and many patients are seen by both ACH and UAMS clinics. For patients who must be seen by both, every effort is made to schedule the appointments at the ACH and UAMS clinics on the same day. However, ACH has no direct role in the management or control of the UAMS clinics. The children seen at the clinics are considered to be patients of UAMS rather than ACH, and UAMS bills for the services.

ACH's outpatient pharmacy fills prescriptions for patients of the ACH clinics, who are registered outpatients of ACH. At present, the ACH outpatient pharmacy will not fill prescriptions written by doctors at the UAMS clinics. UAMS has an outpatient pharmacy on its campus that is available to patients seen in the UAMS clinics located on the ACH campus. You report, however, that the UAMS pharmacy is inconvenient for those patients, and that parents of the patients find the ACH pharmacy's refusal to fill prescriptions from the UAMS clinic doctors confusing and distressing, particularly in cases where the child also received a prescription from an ACH clinic on the same day. You ask, therefore, whether the ACH pharmacy's filling of prescriptions for patients of the UAMS clinics would fall within the scope of the NPIA.

The Supreme Court's opinion in Abbott Laboratories v. Portland Retail Druggists Association (Abbott Labs)(2) is the starting point for analysis of the applicability of the NPIA to nonprofit hospitals' sales of pharmaceuticals. In that case, retail pharmacies sued pharmaceutical manufacturers under the Robinson-Patman Act, challenging their discounted sale of drugs to nonprofit hospitals. The hospitals resold those drugs to patients in a number of different situations. The Court held that the NPIA exemption is a limited one and does not cover all purchases of pharmaceuticals by the hospital.(3)Rather, purchases are covered only insofar as they are for the hospital's "own use" - that is to say, for "use by the hospital in the sense that such use is a part of and promotes the hospital's intended institutional operation in the care of persons who are its patients."(4) Regarding the facts before it, the Court held that drugs dispensed to hospital patients for use on the premises or on a take-home basis for a limited time and to employees, students, and medical staff members for their personal use were covered by the exemption. On the other hand, it held that the connection between the hospital and drugs dispensed to walk-in patients, to non-hospital patients of medical staff members, or to former patients to refill take-home prescriptions was too tenuous to support application of the exemption.

The NPIA appears to cover pharmaceuticals dispensed by the ACH pharmacy to patients of the ACH clinics. In a staff advisory opinion issued to Valley Baptist Medical Center (September 19, 1996), we concluded that the Act applied to drugs prescribed, as part of the care received at the clinic, to patients of a Family Practice Residency Clinic staffed by residents and faculty members working at the hospital. The clinic was characterized as "an extension of the hospital's basic services beyond its four walls and into a setting more accessible to the community," and thus as part of the hospital's basic function of providing patient care. The ACH clinics, likewise, appear to be vehicles for carrying out ACH's basic patient care functions. The children are registered outpatients of the hospital.

Whether the NPIA covers drugs dispensed to patients of the UAMS clinics, however, is a question of first impression. Two prior Commission advisory opinions shed some light on the issue, but neither provides clear guidance with respect to the facts you have described. In one instance, the Commission determined that the Act covers the transfer, at cost, of supplies from a non-profit hospital to an unaffiliated nursing home.St. Peter's Hospital of the City of Albany, 92 F.T.C. 1037 (1978) (revised letter). It concluded that Abbott's limitations on resale were not intended to

apply to resales of supplies, at cost, by one charitable institution to another that are limited, in turn, to the latter charitable institution's own use. A resale of this nature would constitute a not-for-profit transfer of supplies from one institution, eligible under the exemption, to another such institution, also eligible under the exemption. In the Commission's view, the exemption was intended to insulate from Robinson-Patman application all purchases of supplies (for their own use) by the designated classes of institution not operated for profit.. . . The Commission, accordingly, would regard the resale . . . as not altering its exempt status under the [NPIA].

Id. at 1037-38.

Like ACH, UAMS appears to be entitled to the benefit of the exemption with respect to pharmaceuticals it sells to its patients.(5) Thus, UAMS could purchase pharmaceuticals directly pursuant to the protections of the Act and dispense them to patients of its clinics. In addition, ACH could transfer drugs to UAMS at ACH's cost without losing the protection of the Act. The proposed transaction, however, does not directly fall within the rule applied in St. Peters. First, the pharmaceuticals would not be transferred to UAMS but sold directly to its patients. Second, nothing in your letter suggests that ACH would dispense the drugs to UAMS patients at its cost of purchasing those products. Nonetheless, since UAMS is itself an eligible institution that could obtain pharmaceuticals either directly or from ACH and dispense them to these patients pursuant to the Act, the patients' obtaining pharmaceuticals purchased at a nonprofit discount does not appear to be inconsistent with the policy underlying the NPIA.

The Commission also found that the Act covers pharmaceuticals purchased by a hospital and distributed to affiliated long-term care institutions for use in the treatment rendered to patients of the long-term care facilities. Presentation Health System, 116 F.T.C. 1526 (1993) (advisory opinion). The Commission regarded the health system as the purchaser on behalf of both the hospital and the long-term care institutions, and, therefore, the health system was entitled to the benefit of the Act with respect to products purchased for the "own use" of any of the institutions it owned.

Since ACH and UAMS are not under common ownership, Presentation Health Systemdoes not directly apply to the facts you have described. Nonetheless, we conclude that the substance of the relationship between ACH and UAMS in the care of a common patient population, rather than the simple question of which institution bills for the services provided, should govern our analysis. It appears that the two institutions, both of which are eligible entities under the Act, have established a joint venture to care for pediatric patients at the full range of outpatient clinics operated on the ACH campus. All the clinics are staffed by UAMS physicians, and UAMS personnel have a direct role in the clinical management of ACH and of a number of its programs. Based on this close collaboration in the operation of ACH and all of the clinics, we are of the opinion that pharmaceuticals dispensed by ACH's outpatient pharmacy to the UAMS clinic patients would be purchased for ACH's own use within the meaning of the NPIA.

This letter sets out the views of the staff of the Bureau of Competition, as authorized by the Commission's Rules of Practice. Under Commission Rule § 1.3(c), 16 C.F.R. § 1.3(c), the Commission is not bound by this staff opinion and reserves the right to rescind it at a later time. In addition, this office retains the right to reconsider the questions involved and, with notice to the requesting party, to rescind or revoke the opinion if implementation of the proposed program results in substantial anticompetitive effects, if the program is used for improper purposes, if facts change significantly, or if it otherwise would be in the public interest to do so.

Sincerely yours,

Jeffrey W. Brennan
Assistant Director

Endnotes:

1. 15 U.S.C. § 13c.

2. 425 U.S. 1 (1976).

3. Id. at 13-14.

4. Id. at 14 (emphasis in original).

5. In Jefferson County Pharmaceutical Association, Inc. v. Abbott Laboratories, 460 U.S. 150, 155 n.8 (1983), the Court held that the Robinson-Patman Act applies to sales of pharmaceuticals to state and local government hospitals. Because of the posture of the case when it reached the Supreme Court (the district court assumed that at least some of the purchases at issue would not be covered by the NPIA because they were not purchased for the hospitals' own use), the Court did not address the applicability of the NPIA to state-owned hospitals. There appears, however, to be no reason for the Act not to apply to those institutions to the same extent that it applies to private, nonprofit hospitals. See Logan Lanes, Inc. v. Brunswick Corp., 378 F. 2d 212 (9th Cir.), cert. denied, 389 U.S. 898 (1967) (exemption held to apply to purchase by a state agency for use by state university, without regard to whether there was a general exemption for state agencies).